Letter Of Credit And Its Features

Posted by Axios Credit Bank Ltd on December 9th, 2022

A letter of credit is a most popular trade finance instrument used in international trade transactions where both the buyers & sellers are entirely uninformed about each other’s financial status & integrity. The exporter is often hesitant to ship goods or services against a sale contract where he/she is not sure whether the buyer would accept the documents or make the on-time payment. To ensure timely payment, the buyer usually obtains a legal undertaking from the bank, which is known as the International Letter of Credit Services. Let’s find in detail what an LC is and its features.

What is a Letter of Credit?

A letter of credit is a legal, financial document issued by a bank or financial institution in the favor of the exporter that guarantees an on-time payment on behalf of the buyer once the seller submits the required documents to the bank. In the event, that the buyer defaults or is unable to make the payment, the payment will be made by the issuing bank.

Availing of Letter of credit services Malaysia is a good way to ease payments in international transactions. This letter provides an assurance to the seller that they wound up paid on time, even though the buyer defaults as the risk of non-payment is transferred to the bank. Before issuing an LC, the bank must have certain documents in its possession.

Features of Letter of Credit

Since letters of credit have been used in global trade for centuries, there are a few LC characteristics & features in LCs one should know about them. Take a look:

1. Negotiability

Letters of credit are usually considered a negotiable trade finance instrument that can be freely passed from one party to another like money. The issuing bank is compelled to pay not only the beneficiary but also the bank nominated by the beneficiary. However, a letter of credit will only be considered negotiable if it guarantees to pay on demand or at a certain period.

2. Revocability

The Letter of Credit Service Provider Malaysia can issue a revocable or irrevocable letter of credit. Whatever the type is, it will be mentioned on the document what type of credit is being presented.

Talk about the difference, a revocable letter of credit can be revoked or modified for any reason at any time by the issuing bank without any prior notification to the parties. In such a case, a revocable LC cannot be confirmed by the advising bank. This is the reason it is used rarely. While, on the other hand, an irrevocable LC cannot be altered, changed, or modified without the consent of all the parties concerned.

3. Transfer and Assignment

The recipient of an LC has the option to transfer or assign the LC as many times as they want. It will not affect the functionality of a letter of credit. Letters of credits that are administered by the Uniform Commercial Code (Domestic) may be transferred frequently times and it will remain effective.

4. Sight and Time Drafts

While availing of International Letter of Credit Services, keep in mind that it could be paid in one of two ways: sight or time.

When an LC is submitted, it requires the seller to present a draft & specified documents to receive the payment. There are two types of drafts used in letters of credit which are Sight & Time. A sight draft is payable after it is presented while a time draft must be paid within a specific amount of time. In both these situations, the Letter of Credit Service Provider Malaysia will check the LC to ensure its integrity.

Conclusion

The need for applying for a letter of credit procedure in Malaysia occurs due to the involvement of payment risks in international trade transactions. If you are an importer or exporter who is entering into a trade transaction, you should keep its features in mind and choose the most suitable one.

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Axios Credit Bank Ltd

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Axios Credit Bank Ltd
Joined: April 20th, 2021
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